Refinitiv deal wakes ghosts of LBOs past

NEW YORK (IFR) - The return of big buyouts to the leveraged finance market has rekindled memories of the 2006 and 2007 bad old days of risky underwriting and excessive debt.

FILE PHOTO - The logo of Blackstone Group is displayed at the post where it is traded on the floor of the New York Stock Exchange (NYSE) April 4, 2016. REUTERS/Brendan McDermid/File Photo

A US$13.5bn-equivalent debt package for private equity firm Blackstone’s purchase of a stake in Refinitiv - the biggest leveraged buyout since the financial crisis - has helped trigger the comparison because of its size and aggressive adjustments.

So has the quick succession of LBO deals, starting with KKR’s buyout US$1.825bn-equivalent bond for BMC Software in August, and the US$4.685bn-equivalent of bonds and loans working its way through market now to finance Carlyle’s purchase of Akzo Nobel’s specialty chemicals business.

A US$7.2bn debt package for the LBO of Envision Healthcare is also being readied.

“There’s a lot of buzz about whether we are back to 06/07,” one senior leveraged finance banker said. “Are deals big, and are they fully levered? Yes, maybe. But we’re not seeing deals financed by PIK toggles like we did back then when companies couldn’t service their interest in year one.”

Over-levered buyouts from a decade ago that soured are well known: TXU, Univision and Clear Channel to name a few.

TXU, a 2007 deal that still ranks as the largest LBO in history, eventually went bankrupt after it was saddled with US$45bn of debt.

Banks were also stuck with billions of dollars of loans they had underwritten and couldn’t sell as the credit crunch hit in 2008 and capital markets seized up. But the LBO pipeline today is light despite the recent spate of deals.

“The risk that banks have now compared to then is night and day. Once these deals clear, there really isn’t much of a pipeline, and that is actually helping drive demand for the deals,” one private equity source said.

MONSTROUS TIMES

Mike Terwilliger, a portfolio manager at Resource Alts, recalls the days when he was working as a research analyst at Bank of America on some leveraged buyouts.

“We had monstrous deals at monstrous multiples. That was a different era when leverage on deals was more like mid-teens,” said Terwilliger.

“The Thomson deal [Refinitiv] has some of the same characteristics. It has a loose interpretation of Ebitda, and includes 35% add-backs. But we haven’t yet seen the equivalent of 06/07 deals.”

The financing backs Blackstone’s purchase of a 55% stake in Thomson Reuters’ financial data and technology division which will be renamed Refinitiv and includes IFR.

The buyside has to mull, among other things, Refinitiv’s ability to meet its planned US$650m of cost cuts in the first three years.

Still, investors clearly believe Refinitiv has decent cashflows that will help it meet interest payments.

“The underwriting standards are very different from a decade ago. Models back then were generating no free cashflow, and needed revenue to grow. Then we went into recession,” said another senior leveraged finance banker.

“And Blackstone is buying a 55% stake in Refinitiv. It’s not a complete take-private of a huge public company.”